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5 Little Used 401(k) Features That Can Make You Wealthier

If you’re like the vast majority of Americans, you’re probably contributing to your employer’s retirement plan. But are you really taking full advantage of all it has to offer? If not, you may be leaving money on the table. Here are some of the most commonly neglected 401(k) features that could be making you wealthier:

According to our last quarterly research report, only 33% of employees felt confident that their investments were allocated appropriately, and only 18% knew they were on target to replace at least 80% of their income in retirement. This is understandable since it can be hard to know who to trust. Getting unbiased retirement and investment advice can also be quite expensive.

However, many employers provide sophisticated online tools to help employees answer these questions at no additional cost to them. Yet, Wall Street Journal columnist Karen Blumenthal reports that “Only about a quarter of the people who have access to advice through their retirement plans actually take advantage of it, according to retirement-plan providers and firms that provide advice.” In my own experience, when I ask employees at my workshops how many of them use their company’s online tools, I usually only have one or two people raise their hands. Often times, no one does.

Ask your HR department or retirement plan provider if they have such tools available. It generally only takes a few minutes to enter your information and get results. Even better, your employer may offer you the option to speak with a financial planner for more personalized guidance. Just make sure they aren’t compensated to steer you towards any particular product or service to receive the most unbiased guidance possible.

Contribution Rate Escalator

What if you do a retirement analysis and find you need to save more than you can afford? For example, if you’re currently saving 5% of your income and you need to save 15%, tripling your contributions might not be realistic. But could you contribute just 1% more of your income?

With a contribution rate escalator, you can have your retirement plan contribution rate automatically increase by just 1% a year until you reach your target. In this example, your contributions would increase to 6%, then 7% the next year, then 8%, until you reach the 15% target. You would find yourself saving twice as much and may not even feel it along the way, especially considering that the increase may be smaller than your annual raise or cost-of-living adjustment. A 40-yr old earning $80k with an annualized return of 6% in his 401(k) would have almost $300k of additional money at age 65 by increasing his contributions each year from 5% to 15%.

This is such a powerful way of building wealth that a book called The Automatic Millionaire was written on this topic. The book shares the stories of real people with modest incomes who became “automatic millionaires” by slowly increasing their savings over time. Best of all, they didn’t have to budget. You can do the same thing with this common feature found within most retirement plans.

Asset Allocation Funds

Your savings isn’t the only thing you can automate. You can do the same with your investment management too by choosing an asset allocation fund. About 72% of defined contribution plan participants have access to one in their plan that targets either a certain risk level (conservative, moderate, or aggressive) or retirement date. Thirty-four percent have both types available.

However, many of the employees I speak with are not aware of how to use them. The key is to use them as a “one-stop shop,” yet according to Vanguard ,only about a quarter of all 401(k) participants invest solely in target-date funds. Since they are designed to be fully diversified, adding more funds will just throw balances off and could lead to less than optimally designed investment portfolios.

Automatic Re-Balancer

For those who prefer to choose their own asset allocation and pick their own funds, an automatic re-balance feature found in most retirement plans can automate your investing in a different way. For simplicity’s sake, let’s say that your target asset allocation is to have 60% in stocks and 40% in bonds. After a strong year in the stock market, you may have 70% of your portfolio in stocks. It may feel good, but you’re actually taking more stock market risk than you originally intended. What you want to do is re-balance your portfolio by moving enough money out of stocks and into bonds to bring your portfolio back to the 60/40 split.

When the market eventually turns south, you may end up with 50% of your money in stocks and 50% in bonds. In that case, you’d want to re-balance back to the 60/40 again by buying stocks. By doing this, you’ll be keeping your risk level in the right zone while also buying stocks while they’re relatively low and selling them while they’re relatively high. One study of a 10-yr period ending last year showed that re-balancing could have added about half a percent greater return. Our hypothetical 40-yr old earning $80k with a 10% contribution, an annualized return of 6%, and no balance to start with would have had about $37k more in his 401(k) at retirement with that greater return without having to save more or take on additional risk.

Self-Directed Brokerage Account

If you’re dissatisfied with the investment options in your retirement plan, you may want to see if it has a self-directed brokerage account. It may come in the form of a “mutual fund window” with thousands of funds to choose from, or an even more flexible account that may let you invest in ETFs and even individual stocks and bonds. The point is to give you more choice.

So when should you use it? One reason is if your plan doesn’t offer you a specific type of fund that you’re looking for. Maybe you want a conservative allocation fund but you only have target date funds or vice versa. If you’re building your own portfolio, you may find access to missing asset classes like emerging markets, international small cap, or alternative assets like real estate and commodities.

You may also have the right type of funds but they may be too expensive. (The new 401(k) fee disclosures can be quite an eye-opener.) You can often find lower cost options in the self-directed brokerage account. Just be sure to factor in any additional fees that your plan provider may tack on for using the account.

Finally, be aware of other pitfalls that can come with these accounts like investing too much (more than 10-15% of your portfolio) in the stock of one company, or purchasing high cost mutual funds. The investments you purchase in them may also not be included in online advice tools or automatic re-balance programs. These accounts are designed for advanced investors who know how to research and manage their investments. If that sounds like you, you can use them to better diversify your portfolio or reduce your fees. Otherwise, you may want to steer clear.

As you can see, there are a host of retirement plan features that you may have and are not even aware of. They generally cost little or nothing in either time or money. Yet, they can help you build and protect wealth over time. Why not take advantage of them?

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